What is DIP financing, and why would anyone lend to a bankrupt company?

Define it as a loan to a company operating in Chapter 11. Explain why lenders say yes: court-granted superpriority and liens, a possible priming lien, payment in full before a plan is confirmed, and short, tightly controlled terms with high fees.

What the interviewer listens for

• Do you define it as financing for a company operating in Chapter 11?
• Do you name superpriority and liens granted by the court?
• Do you know priming needs consent or adequate protection?
• Do you say the DIP is paid in full at emergence?
• Do you explain why existing lenders often provide it?

Common mistakes

• Calling DIP lending extremely risky.Court-granted priority and liens make it one of the safest positions in the structure.
• Saying a DIP can prime existing lenders automatically.It needs court approval and their consent or adequate protection.
• Confusing the DIP with exit financing, the new debt raised at emergence that often repays it.
• Forgetting that a DIP needs court approval, usually an interim order early in the case and a final one later.

Likely follow-ups

• What is adequate protection?Protection for a secured lender against its collateral losing value during the case, like cash payments, replacement liens or extra collateral.
• What's a carve-out in a DIP order?An amount the DIP and secured lenders agree to rank behind, so professional fees and the US Trustee's fees still get paid if the case goes badly and the lenders' priority would otherwise take everything.
• What's an exit facility?New financing the company puts in place when it emerges from Chapter 11, which usually repays the DIP and funds the reorganized company.

More finance technicals

• Why would a company try an out-of-court restructuring first?
• What signs tell you a company is heading for distress?
• What's the difference between Chapter 11 and Chapter 7?
• What is a 363 sale?
• A company in Chapter 11 is worth $600 million. Claims are a $50 million DIP, $10 million of admin claims, $300 million of first lien, $200 million of second lien, $150 million of unsecured bonds and $50 million of trade claims. Who recovers what?

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